The core constitutional issue behind the Congress’s challenge is whether the appointment of K.G. Bopaiah by Karnataka Governor Vajubhai Vala is an arbitrary use of gubernatorial discretion.

Article 180 (1) of the Constitution gives the Governor the power to appoint a pro tem Speaker.

The Article says that if the chair of the Speaker falls vacant and there is no Deputy Speaker to fill the position, the duties of the office shall be performed “by such member of the Assembly as the Governor may appoint for the purpose”.

The Supreme Court on Thursday ordered the appointment of a pro tem Speaker to conduct a floor test to decide the majority in the Karnataka Assembly on May 19.

It is the Governor’s duty to make the appointment. Article 180 (1) is silent about the extent to which the Governor can use his or her discretion.

The BJP defends the Governor’s appointment of Mr. Bopaiah by quoting Article 163 (2) of the Constitution. The latter part of this Article mandates that the validity of anything done by the Governor shall not be called in question on the ground that he ought or ought not to have acted in his discretion

But the five-judge Constitution Bench of the Supreme Court in the Nabam Rebia judgment of 2016 ruled that Article 163 does not give Governors a “general discretionary power” as is often misunderstood.

The Court held that the area for the exercise of his [Governor’s] discretion is limited. Even this limited area, his choice of action should not be arbitrary or fanciful. It must be a choice dictated by reason, actuated by good faith and tempered by caution.

The Rebia case dealt with the problem of the Arunachal Pradesh Governor advancing the date for the sixth Assembly session.

Judicial review

An issue which may arise is whether the discretion of the Governor can be judicially reviewed by the Supreme Court. But a Constitution Bench judgment in 2006 in the Rameshwar Prasad case has held that the “immunity granted to the Governor under Article 361 (1) does not affect the power of the Court to judicially scrutinise the attack made to the proclamation under Article 361(1) of the Constitution of India on the ground of mala fides or it being ultra vires”.

The UN human rights chief slammed Israel’s deadly reaction to protests along the Gaza border as “wholly disproportionate”, backing calls for an international investigation.

Addressing a special session of the UN Human Rights Council on the violence which has claimed more than 100 Gazan lives in six weeks, Zeid Ra’ad Al Hussein warned that “killing resulting from the unlawful use of force by an occupying power may also constitute wilful killings, a grave breach of the Fourth Geneva Convention”.

Violations of the Geneva Conventions adopted in 1949 following World War II are commonly called “war crimes” although Mr. Zeid did not explicitly use that word.

The special UN session comes after six weeks of mass protests and clashes along the Gaza border with Palestinian refugees demanding the right to return to their homes inside what is now Israel.

Israel has justified its actions, arguing it was necessary to stop mass infiltrations from the blockaded Palestinian enclave which is run by the Islamist Hamas movement.

The council is due to consider a draft resolution calling for the urgent dispatch of an independent, international commission of inquiry — the UN rights council’s highest-level of investigation.

The European Union took formal steps to shield its firms from U.S. sanctions on Iran as part of efforts to save the international nuclear deal with Tehran.

EU leaders meeting in Bulgaria gave the European Commission, the bloc’s executive arm, the all-clear amid a deepening rift with Washington.

The commission said it launched the formal process to activate the blocking statute by updating the list of U.S. sanctions on Iran falling within its scope. The commission said it hopes the statute will be in force before August 6 when the first batch of reimposed U.S. sanctions take effect.

President Donald Trump last week pulled Washington out of the 2015 international deal with Iran to curb its nuclear programme in return for easing sanctions.

The statute, which the 28 EU member states and the European Parliament must endorse, is aimed at reassuring European firms that invested in Iran after the deal.

The blocking statute forbids EU companies from complying with the extraterritorial effects of US sanctions.

It also allows companies to recover damages arising from such sanctions from the person causing them, and nullifies the effect in the EU of any foreign court judgements based on them.

Brussels took steps on three other fronts to shore up the Iran deal, signed not just by the EU but EU members Britain, France and Germany, along with China and Russia.

Blocking Statute

The “blocking statute” is a 1996 regulation originally created to circumvent Washington’s trade embargo on Cuba, which prohibits EU companies and courts from complying with specific foreign sanction laws.

However, the Cuba row was settled politically, so the blocking regulation’s effectiveness was never put to the test, and its value may lie more in becoming a bargaining chip with Washington.

Since the U.S. withdrawal, the remaining parties have all pledged to stick to the deal if Tehran respects its terms. Beijing and Moscow have also stepped up efforts to save the deal.

Tehran has warned it is ready to resume no-holds-barred “industrial-scale” uranium enrichment unless Europe can provide solid guarantees to preserve Iran’s economic benefits under the deal.

Right track

On other fronts, the Commission moved to remove hurdles for the European Investment Bank (EIB) to finance activities outside the EU, such as in Iran.

It said the move will “allow the EIB to support EU investment in Iran,” particularly involving small and medium-sized companies.

The commission called for doing more to help Iran’s energy sector and small and medium-sized companies, as part of “confidence-building measures.”

Northern Province Chief Minister C.V. Wigneswaran on Friday asked Tamils to observe May 18 as ‘Tamil genocide day’ every year, and sought international support to set up a mechanism that ensures justice for the victims.

Thousands of Tamils culminated there to pay respects to their relatives who died during the war.

In February 2015, the Northern Provincial Council passed a strongly-worded resolution accusing different governments at the centre of committing ‘genocide’ against Tamils. The resolution evoked sharp response from politicians in the country’s Sinhala-majority south.

Sri Lanka’s civil war, which spanned more than three decades, ended in May 2009, when the armed forces defeated the LTTE. The final days of the war claimed as many as 40,000 lives, according to UN estimates.

Observing that successive governments have continued to keep Tamils under military control in areas that the community historically inhabited, Mr. Wigneswaran said the international community must, without delay, set up an international strategic mechanism to ensure justice for the people affected.

The government expects a maximum impact of $50 billion on the oil import bill due to rising oil prices, according to Economic Affairs Secretary Subhash Chandra Garg.

The Indian basket has gone up and if prices go up then this will naturally have an impact on the oil import bill. Last year’s oil import bill was $110 billion. We estimate a maximum additional impact of $25-50 billion under various scenarios of price levels. The current account deficit will also be impacted.

The Secretary also said it was not true that the government’s revenue increases when oil prices rise, since the excise duty on fuel is a set amount per litre and not a percentage of the price.

Garg also sought to allay concerns about the state of the economy saying the fiscal deficit management programme was working smoothly, economic growth was sound and inflation was within the comfort range.

The situation on oil prices and changes in the U.S. with interest rates going up have altered incentives for foreign portfolio investors.

Foreign investors pulled out more than Rs.15,500 crore from the Indian capital market in April, the highest outflow in 16 months.

With an aim to deepen the commodity derivatives market, regulator SEBI on Friday proposed allowing trading in this segment by foreign entities with exposure to the Indian physical commodity market.

Initially, foreign entities may be allowed to hedge their exposures with derivatives trading in only those commodities where India has a large production, consumption or export share globally, barring sensitive commodities.

Proposing norms for eligibility, disclosure and KYC requirements, code of conduct and safeguards against price fluctuations, a consultation paper said public comments would be welcome till June 18.

The National Stock Exchange (NSE) has become the first Indian exchange to get an exemption from the Commodity Futures Trading Commission (CFTC) that will allow members of the Indian bourse to trade in derivatives for U.S. clients.

The order issued to NSE permits its members to accept U.S. customer funds directly for the purpose of trading in futures and options contracts on NSE without the members having to register with the CFTC as a futures commission merchants.

The CFTC issued a Part 30 exemptive order dated May 17, 2018 to the National Stock Exchange of India (NSE) as part of its program of regulatory deference to foreign regulatory frameworks.

Part 30 exemptive program of CFTC provides U.S. customers with increased access to foreign futures markets.

CFTC is an independent agency of the U.S. government that regulates the futures and options markets and monitors various organisations related to derivatives clearing, futures commission merchants and swap data repositories among others.

SEC recognition for BSE

Incidentally, the development comes just days after the BSE becoming the first Indian exchange to be recognised as a Designated Offshore Securities Market (DOSM) by the U.S. Securities and Exchange Commission (SEC).

The DOSM status allows the sale of securities to U.S. investors through the trading venue of BSE without registration of such securities with the U.S. SEC and thus eases the trades by U.S. investors in India.

The 15th Finance Commission has to take a call on the degree of equalisation that’s feasible.

15th Finance Commission (FFC)

Key aspects:

The mandate for using the 2011 population.

‘whether revenue deficit grants’ be given at all;

The impact of the goods and services tax (GST) on the finances of the Centre and States;

The reference to ‘conditionalities’ on State borrowing; and

providing performance incentives in respect of some contentious indicators.

Background:

The Fifteenth Finance Commission was constituted by the Modi government, after the approval from the President of India, through a notification in the Gazette of India in November 2017.

K. Singh was appointed as the commission’s chairman, with its full-time members being Shaktikanta Das and Anoop Singh and its part-time members being Ramesh Chand and Ashok Lahiri.

The commission was set up to give recommendations for five years commencing on 1 April 2020.

The main tasks of the commission were to “strengthen cooperative federalism, improve the quality of public spending and help protect fiscal stability”.

That commission’s job was harder because of the rollout of goods and services tax (GST), as, it had taken certain powers related to taxation away from states and the Union and had given it to the GST Council.

Evolution:

Shift from 1971 to 2011

The southern States apprehend that they stand to lose under the so-called ‘population criterion’ if the 2011 population replaces the use of 1971 figures.

State populations change not only because of their differential population growth but also due to migration.

Using 1971 population data implies consciously using information that would be 50 years out of date by 2020-21, the first year of the FFC’s recommendation period.

Population data used by the successive Finance Commissions in different criteria have served as a ‘scaling’ factor — that is, the larger the size of the population, the larger is the magnitude of fiscal transfer.

In principle, fiscal transfer is determined in per capita terms and then scaled up to cater to the entire population living in the State.

In deriving the per capita GSDP (Gross State Domestic Product), it is always calculated using current rather than dated population, as is done in the ‘income distance’ criterion.

Scaling per capita transfer up only to an imaginary size of population such as the 1971 population for years beyond 1971 was always an artificial exercise.

No other major federation uses such a practice.

Major federations like Canada and Australia with well-established fiscal transfer principles use all relevant information that is up-to-date as much as possible.

Losses or gains depend on the relative weights attached to different criteria, and changes in other information including per capital GSDP.

There is a case under the present circumstances to have a relook and lower the weights attached particularly to the population and income-distance criteria.

It is interesting to note that the weight attached to the population criterion has varied from 25% to 10% and that attached to the distance formula from 62.5% to 50% from the 10th to the 14th FCs.

The reference in the ToR regarding revenue deficit grants does not necessarily imply that grants given under Article 275(1) should be discontinued.

This article enjoins the Finance Commission first to determine the ‘principles’ which should govern the grants-in-aid of the revenues of the State and then determine the ‘sums’ that are to be paid.

Revenue deficit grants often did follow implicitly the gap-filling approach, even though moderated by application of some partial norms.

This approach has been heavily criticised in the literature on fiscal transfers in India for the adverse incentives that it generates.

In fact, there is a strong case to discontinue revenue deficit grants based on gap filling but continue to recommend grants under Article 275(1) based on more acceptable principles.

Horizontal allocations:

Most major federations follow an equalisation approach to determine fiscal transfers that is consistent with the objectives of equity and efficiency.

In fact, The FFC has been asked to be ‘guided by the principles of equity, efficiency, and transparency’.

Under the principle of equalisation, transfers aim to ‘equalise’ fiscal capacities, enabling States to provide services at comparable standards provided they make comparable tax effort after taking into account cost and use disabilities.

Equalisation grants are policy neutral and need not be sector-specific although the 11th and 12th Commissions used the equalisation principle partially to provide sector-specific grants.

It is the application of the ‘equity’ principle that has resulted in relatively well-off States losing their share. It has no other connotation.

Mineral-rich States:

Jharkhand, Odisha, Chhattisgarh, Madhya Pradesh and Assam:

These coal-rich States continue to carry a significant pollution load on behalf of the nation. They lost the opportunity of early industrialisation due the Centre’s policy of freight equalisation whereby the transport of coal was subsidised, thereby neutralising their main location benefit.

For the mineral-rich States, the cost of their environmental load should be incorporated

With freight equalisation, many thermal power plants were set up in the southern States, powering their industrial growth.

Although freight equalisation is now discontinued, environmental constraints beset setting up of industries in these mineral-rich States.

The Finance Commission has the difficult task of resolving competing claims of different groups of States.

Finance commission’s policy neutrality:

This is best done by adhering to the most appropriate principles, including that of policy neutrality.

The Finance Commission, which is ideally expected to provide a symmetric treatment between the Centre and States, is not the appropriate platform for promoting Central policy priorities.

References in the ToR to the Centre’s flagship schemes, ‘populist policies’ of States and conditionalities on State borrowing imply an asymmetric view of the Centre vis-à-vis States.

In fact, as far as State borrowings are concerned, after the recommendation of the 12th Finance Commission, major States do not borrow from the Centre.

Devolution of taxes:

The 14th Finance Commission raised the proportion of sharable taxes to states to 42%

It was at pains to point out that the increase was largely meant to ‘enhance the share of unconditional transfers to the States’.

In deciding on the share, it is necessary to take into account not only the constitutional responsibilities but also the perceptions of the people who look to the Central government for remedies to all issues.

It started with economic planning. Every economic issue is now laid at the door of the Centre itself.

Perhaps, we are reaching a situation where the Constitution itself can be amended to fix the share that must go to States and leave Finance Commissions only with the task of horizontal allocation.

Even as the share going to States gets increased, there is need to include ‘contribution to Central taxes’, suitably measured, also as a criterion in horizontal distribution as some of the taxes are vested in the Centre only on grounds of efficiency and economy.

Fiscal transfers in India have long been characterised by two major inefficiencies:

The use of dated population figures and a ‘gap-filling’ approach.

Implementing a comprehensive equalisation approach would overcome these deficiencies.

This requires estimating States’ fiscal capacities reflecting their tax bases. In the case of the GST, consumption rather than income would be a better tax base.

This should be supplemented by the tax-bases of the non-GST taxes. To assess the expenditure needs, cost and use disabilities should be incorporated.

This should capture higher health expenditures for some States like Kerala where the population is ageing.

For the hilly States, remoteness would be a cost-related disability.

Full equalisation in India implies considerable redistribution due to the large populations of the low fiscal capacity States

Conclusion:

Rangarajan and Srivastava, ‘Reforming India’s Fiscal Transfer System’ has to be referred.

The FFC has to take a call on the degree of equalisation that may be considered feasible.

A balancing of criteria is needed.

Most of India’s future potential growth will be driven by the States which can effectively utilise their demographic dividends, which will be facilitated by an adequate provision of education and health services in these States.

This would facilitate an accelerated growth of their fiscal capacities requiring relatively less redistribution for achieving greater equalisation over time.

F. Prelims Fact

Nothing here for today!!!

G. Practice Questions for UPSC Prelims Exam

Question 1. Consider the following statements about Commodity market:

It is the market where a wide range of products are traded.

This would help investors hedge their commodity risk.

Which of the following statements are correct?

1 only

2 only

Both 1 and 2

None of the above

See

Answer

(c)

Type: EconomyLevel: ModerateExplanation:

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded.

It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

Derivatives as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well.

Question 2. Consider the following statements:

A commodity derivatives market or exchange is a public marketplace where commodities are contracted for purchase or sale at an agreed price.

These purchases and sales are made under the terms and conditions of a standardized futures contract.

Which of the following statements are correct?

1 only

2 only

Both 1 and 2

None of the above

See

Answer

(a)

Type: EconomyLevel: ModerateExplanation:

A commodity derivatives market (or exchange) is, in simple terms, nothing more or less than a public marketplace where commodities are contracted for purchase or sale at an agreed price for delivery at a specified date.

These purchases and sales, which must be made through a broker who is a member of an organized exchange, are made under the terms and conditions of a standardized futures contract.

Commodity prices do vibrate more rapidly and provide profitable opportunities, accordingly recessions, depressions and booms offer many opportunities to scoop up profits.

Question 3. Consider the following statements:

World Economic Situation and Prospects (WESP) has ranked India as the fastest growing economy.

The Report is published by the agencies of UN.

Which of the following statements are correct?

1 only

2 only

Both 1 and 2

None of the above

See

Answer

(c)

Type: EconomyLevel: ModerateExplanation:

UN World Economic Situation and Prospects (WESP)

According to UN World Economic Situation and Prospects (WESP), India’s economy is projected to grow 7.6% in fiscal year 2018-19, making it fastest growing economy in the world.

The report is a joint product of UN Department of Economic and Social Affairs (UN/DESA), UN Conference on Trade and Development (UNCTAD) and five United Nations regional commissions.

Question 4. Consider the following statements about Pakal Dul Dam and Hydro Project:

It is a Project on the Marusadar River, a tributary of the Chenab River, in Kishtwar district of the Indian state of Jammu and Kashmir.

It will be the first-ever power project of the state with a storage capacity in 0.5 million acres of area.

Which of the following statements are correct?

1 only

2 only

Both 1 and 2

None of the above

See

Answer

(c)

Type: GeographyLevel: ModerateExplanation:

Pakal Dul Dam and Hydro Project

It is a Project on the Marusadar River, a tributary of the Chenab River, in Kishtwar district of the Indian state of Jammu and Kashmir.

It is being constructed by the Chenab Valley Power Projects (CVPP), which will be the first-ever power project of the state with a storage capacity in 0.5 million acres of area.

A total of 1,000 MW will be generated by the Pakal Dul project, 624 MW by Kiru hydroelectric project while 540 MW by Kwar hydroelectric project.

H. UPSC Mains Practice Questions

General Studies II

The threat to groundwater in India is not only from over-exploitation but also from arsenic contamination. Discuss.

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